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When do fixed exchange rates work? Evidence from the Gold Standard

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  • Chen, Yao
  • Ward, Felix

Abstract

Current account reversals under the Gold Standard (1880–1913) – a fixed exchange rate regime – were accompanied by few, if any, output losses. To understand why, we build and estimate an open economy model of the Gold Standard, which allows us to quantitatively assess the importance of three channels of external adjustment: flexible prices, international migration, and monetary policy. Our first finding is that flexible prices were the most influential channel through which output was stabilized, whereas migration and monetary policy mattered little. Our second finding is that price flexibility was predicated on large primary sectors. Their flexibly priced products dominated the export booms that stabilized output during major external adjustments.

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  • Chen, Yao & Ward, Felix, 2019. "When do fixed exchange rates work? Evidence from the Gold Standard," Journal of International Economics, Elsevier, vol. 116(C), pages 158-172.
  • Handle: RePEc:eee:inecon:v:116:y:2019:i:c:p:158-172
    DOI: 10.1016/j.jinteco.2018.11.003
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    Cited by:

    1. Luca Pensieroso & Romain Restout, 2018. "The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2018016, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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    Keywords

    External adjustment; Sectoral structure; Migration; Target zone; Price rigidity; DSGE; Bayesian estimation; Real effective exchange rate;

    JEL classification:

    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • F2 - International Economics - - International Factor Movements and International Business
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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